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Historical Effective Federal Tax Rates: 1979 To 2005
Historical Effective Federal Tax Rates: 1979 To 2005
December 2007 The following tables update the series of historical effective tax rates estimated by the Congressional Budget Office (CBO) by providing values for an additional calendar year2005.1 The tables show effective tax rates for the four largest sources of federal revenuesindividual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxesas well as the total effective rate for the four taxes combined. The tables also present average pretax and after-tax household income; counts of households; and shares of taxes, income, and households for each fifth (quintile) of the income distribution and for the top percentiles of households.
of wages earned above the Social Security taxable maximum also increased, further pushing down the effective payroll tax rate.
Methodology
The Congressional Budget Office uses a multistep methodology to produce its estimates of the distribution of income and taxes. The Current Population Survey (CPS) and the Statistics of Income (SOI) are the primary sources of data for CBOs estimates of population and household income. CBO estimates federal taxes for each household on the basis of income, demographic characteristics, and existing laws in the relevant year. CBO then groups the households into quintiles on the basis of their income and tabulates the income and taxes for each quintile.
Sources of Data
CBOs analysis of effective tax rates draws information on income from two primary sources. The SOI, produced by the Internal Revenue Service, reports much of the information that taxpayers provide on their individual income tax returns. The March supplement to the Bureau of the Censuss CPS contains survey data on both the demographic characteristics and income of a large sample of households. CBO statistically matches each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. The matching process begins by dividing all records in both the CPS and the SOI into demographic subgroups on the basis of household composition, including the marital status of the head of the household, the number of children, and the number of elderly members. Because income measures in the SOI and CPS are not directly comparable, CBO uses a regression equation for each demographic subgroup (which is estimated using data from the SOI) to calculate a predicted income for each record for each source of data. All CPS and SOI records are ranked by predicted income within demographic subgroups, and the two files are then matched, starting at the top of the income distribution: the SOI record with the highest predicted income is matched with the CPS record with the highest predicted incomeafter their sample weights are taken into account.2 The SOI record with the next highest predicted income is then matched with the corresponding CPS record, and the process is repeated until all SOI records in the demographic subgroup have been paired with CPS records. Each pairing results in a new record that takes on the demographic characteristics of the CPS record and the income reported in the SOI. Some types of income, such as most transfer payments and in-kind benefits, appear only in the CPS; values for those items are drawn directly from that survey. Because not all households have to file tax
2. Because both the SOI and the CPS are stratified samples, each record is assigned a sample weight indicating its relative size in making up the entire population represented by the database. The matching process takes account of those weights by effectively considering each record to be replicated by the number of times indicated by its weight.
returns, some households do not appear in the SOI; thus, the CPS reflects more households. After all SOI records have been matched to CPS records, the remaining survey records are recorded as nonfilers, and the income values are taken directly from the CPS. CBO then estimates the tax liability for each matched record.
Measuring Income
This analysis focuses on households adjusted pretax comprehensive income. That measure includes all cash income (both taxable and tax-exempt), taxes paid by businesses (which are imputed to individuals, as noted above), employees contributions to 401(k) retirement plans, and the value of income received in-kind from various sources (such as employer-paid health insurance premiums, Medicare and Medicaid benefits, and food stamps). The calculations use the Census Bureaus fungible value measure to determine the cash equivalent of in-kind government transfer payments.
Income Quintiles
In a series of steps, CBO combines the income and taxes of households to create tables showing distributions of income and taxes among income groups and types of households. First, CBO adjusts for household size by dividing household income by the
3. See, for example, William C. Randolph, International Burdens of the Corporate Income Tax, CBO Working Paper 2006-09 (August 2006).
square root of household size, to take account of the differing needs of larger and smaller households.4 In the next step, CBO ranks households by their (adjusted) income and groups them in quintiles (fifths of the distribution). The quintiles contain equal numbers of people, but because households vary in size, quintiles generally contain unequal numbers of households. CBO then tabulates overall income and taxes for each quintile as well as for smaller groupings at the top of the distribution.
Types of Households
Separate tables in the appendix show effective tax rates and income for three different types of households: those with members under age 18 (households with children), those headed by a person age 65 or older and with no member under age 18 (elderly childless households), and all others (nonelderly childless households). Those tables group households into quintiles based on their position in the population-wide income distribution, not the sub-population distribution, so households within a subpopulation need not be evenly spread across the income quintiles.
All Households
Table 1A. Effective Federal Tax Rates Table 1B. Shares of Federal Tax Liabilities Table 1C. Number of Households, Average Pretax and After-Tax Income,
4.
CBO used adjusted income only to rank households in the income distribution; the values for average income in Summary Table 1 and Tables 1C, 2C, 3C, and 4C of the appendix are based on income unadjusted for household size.
Table 3B. Shares of Federal Tax Liabilities Table 3C. Number of Households, Average Pretax and After-Tax Income,
Summary Table 1.
Income Category
2004 Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile All Quintiles Top 10% Top 5% Top 1% 23.6 21.9 22.0 22.3 23.0 113.3 11.6 5.8 1.2 15,800 37,200 58,000 84,500 214,500 81,300 307,800 457,400 1,299,300 15,100 33,500 49,800 69,900 160,400 64,900 224,400 326,100 891,600 4.3 9.9 14.1 17.3 25.2 20.1 27.1 28.7 31.4 2005 Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile All Quintiles Top 10% Top 5% Top 1% 24.1 22.0 22.2 22.6 23.1 114.5 11.7 5.8 1.1 15,900 37,400 58,500 85,200 231,300 84,800 339,100 520,200 1,558,500 15,300 33,700 50,200 70,300 172,200 67,400 246,300 369,800 1,071,500 4.3 9.9 14.2 17.4 25.5 20.5 27.4 28.9 31.2 -6.5 -1.0 3.0 6.0 14.1 9.0 16.0 17.6 19.4 8.3 9.2 9.5 9.7 6.0 7.6 4.8 3.5 1.7 0.4 0.5 0.7 1.0 4.9 3.1 6.1 7.4 9.9 2.1 1.3 1.0 0.8 0.5 0.8 0.4 0.3 0.2 -6.2 -0.9 3.0 5.9 13.9 8.7 15.9 17.6 19.7 8.0 9.1 9.5 9.7 6.6 8.0 5.4 4.1 1.9 0.4 0.4 0.6 0.8 4.2 2.6 5.5 6.7 9.5 2.3 1.3 1.1 0.9 0.5 0.8 0.4 0.3 0.2
Source: Congressional Budget Office. Notes: Income categories are defined by ranking all people by their comprehensive household income adjusted for household size--that is, divided by the square root of the household's size. (A household consists of the people who share a housing unit, regardless of their relationships.) Quintiles, or fifths, of the income distribution contain equal numbers of people. Comprehensive household income equals pretax cash income plus income from other sources. Pretax cash income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and retirement benefits plus taxes paid by businesses (corporate income taxes and the employer's share of Social Security, Medicare, and federal unemployment insurance payroll taxes) and employee contributions to 401(k) retirement plans. Other sources of income include all in-kind benefits (Medicare, Medicaid, employerpaid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance). Households with negative income are excluded from the lowest income category but are included in the totals.
Summary Table 2.
Income Category
2004 Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile All Quintiles Top 10% Top 5% Top 1% 20.8 19.4 19.4 19.7 20.3 100.0 10.3 5.2 1.0 4.1 8.9 13.9 20.4 53.5 100.0 38.9 29.0 16.3 4.9 10.0 14.9 21.2 50.1 100.0 35.5 25.9 14.0 0.9 4.4 9.7 17.6 67.2 100.0 52.5 41.4 25.4 2005 Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile All Quintiles Top 10% Top 5% Top 1% 21.1 19.2 19.3 19.7 20.2 100.0 10.2 5.1 1.0 4.0 8.5 13.3 19.8 55.1 100.0 40.9 31.1 18.1 4.8 9.6 14.4 20.6 51.6 100.0 37.4 27.8 15.6 0.8 4.1 9.3 16.9 68.7 100.0 54.7 43.8 27.6 -2.9 -0.9 4.4 13.1 86.3 100.0 72.7 60.7 38.8 4.3 10.1 16.7 25.1 43.6 100.0 25.8 14.4 4.0 0.6 1.4 3.0 6.2 87.8 100.0 81.6 74.9 58.6 11.1 14.4 18.1 21.9 34.1 100.0 21.2 13.5 5.5 -2.9 -0.9 4.7 13.8 85.3 100.0 70.8 58.5 36.7 4.1 10.1 16.5 24.9 44.3 100.0 26.2 14.8 4.0 0.6 1.5 3.0 6.5 87.3 100.0 81.4 74.7 59.5 11.1 14.9 18.4 22.1 33.1 100.0 20.2 12.6 4.8
Source: Congressional Budget Office. Notes: Income categories are defined by ranking all people by their comprehensive household income adjusted for household size--that is, divided by the square root of the household's size. (A household consists of the people who share a housing unit, regardless of their relationships.) Quintiles, or fifths, of the income distribution contain equal numbers of people. Comprehensive household income equals pretax cash income plus income from other sources. Pretax cash income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and retirement benefits plus taxes paid by businesses (corporate income taxes and the employer's share of Social Security, Medicare, and federal unemployment insurance payroll taxes) and employee contributions to 401(k) retirement plans. Other sources of income include all in-kind benefits (Medicare, Medicaid, employerpaid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance). Households with negative income are excluded from the lowest income category but are included in the totals.